Changes Rattle E. German Economy

ByDavid R. FrancisNovember 17, 1989

ECONOMIST Jan Vanous says ``it would take real talent not to pull the East German economy up dramatically by the year 2000 above the average level of development in the [European] Common Market.'' That would be a change indeed. At present, per capita output in the German Democratic Republic is above that in Spain, but well below most of Western Europe, including Britain, Italy, the Netherlands, Belgium, and Austria, calculates Dr. Vanous. This expert on the East European economies and editor of PlanEcon Report estimates that per capita output in East Germany was $9,360 in 1988, about 66 percent of that in West Germany.

His prediction assumes that the new East German government is willing to be rescued economically, willing to allow massive investment by West German business and other Western companies, willing to shift from central planning to free enterprise.

The East German Communist Party's Central Committee last Friday promised ``far-reaching economic reform.'' It talked of ``a Socialist planned economy oriented toward market conditions'' - whatever that means. It is too early to tell how far Egon Krenz, the new party leader, and his Cabinet colleagues will actually go in loosening their strict control of the economy.

The Bonn government offered a carrot this week. It said it would make loans available to West German entrepreneurs investing in East Germany if that country carried out a ``thorough change.'' The money is to come from a reconstruction fund totaling $2.5 billion.

Vanous also counts on the ``superior, highly motivated labor force'' in East Germany for his year 2000 scenario.

Despite this advantage, the East German government will likely find that getting from its present economic and political stagnation to that promised prosperity involves some perilous years.

For one thing, the massive emigration to West Germany will likely result in a sharp economic downturn in 1990. Predictions are that 300,000 to 400,000 East Germans will have moved west by the end of this year, of which 220,000 to 290,000 were active in the labor force. Vanous calculates this could mean a drop of 3.2 to 5.1 percent in the national output of East Germany next year.

If the Krenz government does not deliver on its promise of democracy and economic reform, up to 1 million East Germans could emigrate in 1990, notes Vanous in a new report. Then the East German economy would shrink as much as 9 to 14 percent.

The flight of young, well-educated people is already straining many firms and services, damaging the quality of life in East Germany. For example, enough doctors and other medical professionals have fled to cause problems in hospitals.

One factor connected to emigration is the inconvertability of the East German mark. At present, the official exchange rate is one East German mark for one West German mark. But the black market rate is 10.5 to one. If travel between the two Germanys remains open and commerce and investment become freer, that could cause major distortions.

As an example, Hannes Adomeit, the former head of Soviet and East European studies at a major West German think tank, cites the theoretical case of an East Berlin auto mechanic, say one working for the state transit system. If he were to take the subway to West Berlin each day to work in an auto repair shop, he probably would double his wages - say from 1,000 East German mark per month to 2,000 West German marks. But he could then change that money on the black market to more than 20,000 East German marks. He would suddenly be wealthy, especially since housing, food, and other necessities in his East Berlin home are heavily subsidized by the state.

Similarly, West Berliners, including all the Turk, Yugoslav, and other guest workers living there, could travel to East Berlin to buy subsidized food, children's clothes, and other cheaper goods.

``It would mean rampant inflation,'' says Mr. Adomeit, teaching for the past few months at the Fletcher School of Law and Diplomacy at Tufts University. And maybe a drastic shortage of goods. He wonders whether East Germany will be forced to reinstitute some form of currency controls at its borders. Amidst the current euphoria, he sees difficulties ahead.